"End Of This Merger": Analyst Warns Of Potential Spirit Airlines Bankruptcy

After a federal judge in Boston blocked JetBlue's $3.8 billion merger with Spirit Airlines on Tuesday, the question on everyone's mind: What comes next? Is this the end of the merger story? 

To answer those questions, TD Cowen analyst Helene Becker joined Yahoo Finance Live late Tuesday to discuss Spirit's next move. 

Becker explained the more likely option for Spirit after the failed merger is to seek a Chapter 11 filing: 

"It's the end of this merger, for the time being, we expect that JetBlue will consider leasing in aircraft, or placing an aircraft order for aircraft, so it can grow organically, although it will take years what Spirit could have done for them. 

"For Spirit, however, we think they've got bigger issues. If you look at their income statement, look at their balance sheet, they just raised $418 million in cash by doing tallies transactions on their aircraft, and they have had a lot of unencumbered assets they were able to mortgage, but when airlines have cash flow problems, that kind of argues when you raise a lot of capital for going into chapter 11 sooner rather than later if you're going to provide your own debtor-in-possession financing, which is what we think Spirit will do."

Shares of Spirit have crashed more than 60% since the judge blocked the merger. 

Here's the full transcript of the interview:

JOSH SCHAFER: The Federal judge blocking JetBlue's purchase of Spirit Airlines that proposed $3.8 billion deal would have produced the country's fifth largest airline. Helane Becker, TD Cowen Senior Research Analyst joins us now for more. Helane, it is great to have you on the show. Maybe just to start with, give me your response to that headline, your reaction Helane. We're you surprised by that, or no, you saw this one coming?

HELANE BECKER: No, we saw it coming. We expected that the DOJ would block the merger on antitrust grounds to begin with. And then we thought if the judge really listened to what the companies were saying, that he would come to the conclusion that this deal had to happen. But I think the DOJ wound up making a strong case and issued concerns for low fares in the South Florida market, especially for visiting friends and relatives because that's a big part of Spirit's business plan.

But when you do a little more digging, you find that Spirit may have a hard time surviving without this merger.

MADISON MILLS: Well, that brings me exactly to my next question, Helene. What comes next here? Is this the end of this merger story? And if not, how are these names going to move forward?

HELANE BECKER: Yeah. So yes, it's the end of this merger for the time being. We expect that JetBlue will consider leasing in aircraft or placing an aircraft order for aircraft. So it can grow organically although it will take years to do what Spirit could have done for them. For Spirit, however, we think they've got bigger issues. If you look at their income statement, you look at their balance sheet, they just raised $418 million in cash by doing a sale lease-- by doing sale leaseback transactions on their aircraft.

And they have had a lot of unencumbered assets that they were able to mortgage. But when airlines have cash flow problems, it argues when you raise a lot of capital for going into Chapter 11, sooner rather than later, if you're going to provide your own debtor in possession financing, which is what we think Spirit will do. So Madison, from a timeline perspective, we expect Spirit to reach out to others between now and March 1st.

And then we don't expect other airlines to step up primarily because the DOJ would probably block any merger at this point for them. And then we expect that they'll file for Chapter 11 sometime during the second half of the year. And then we think if even that late, I mean, they may do it sooner rather than later. And then we think that the lessors have no reason to negotiate lower lease terms, which is what would happen in bankruptcy.

They may wind up repossessing their aircraft in which case JetBlue could lease in the aircraft at a lower rate than by buying the company altogether. But there's also no guarantee that the lessors will keep the aircraft in the US market. There's a lot of demand worldwide for narrow-body A320s especially given Boeing's issues. So we think that a lot of those planes are likely to wind up outside the United States.

JOSH SCHAFER: And Helane, I'm also curious, just as someone who covers JetBlue, how costly is this potentially going to be for the airline? What are breakup fees like here?

HELANE BECKER: Yeah. Actually it's not as bad as you think, Josh. So it's a $70 million breakup fee to Spirit that JetBlue has to pay. And they've already made all the payments to shareholders. There was one more that they announced, I think last week, like Thursday or Friday, that they had one more payment to make that would be paid at the end of the month. But that's done and then that's a $70 million breakup fee. You know, for JetBlue-- well, you may not know.

But for JetBlue, we think it's actually not a bad outcome because we think they'll be able to get those assets in a liquidation of Spirit at a better lease term than taking on all the debt that Spirit had and taking on all the encumbrances that went with Spirit. And growing organically will take longer, but they'll be able to do it more cost efficiently.

MADISON MILLS: So Helene, there's no shortage of news right now in the names that you cover, obviously today's news, a new CEO for JetBlue, and the Boeing elephant in the room. How can investors play this moment? And is there a buying the dip opportunity hidden underneath some of these headlines?

HELANE BECKER: So yeah, it's been a really tough start to the year. And the airlines canceled a lot of flights over the last, say four or five days, owing to the weather around the country, which has been pretty bad too. So here's what we think. Our top pick or best idea for 2024 is Delta. Then we have outperform ratings on Copa, the Panamanian-based airline.

There are a lot of really great reasons to own the shares, not the least of which is, Panama doesn't get into the issues that the rest of Latin and South America get into because they use the US dollar. Actually, Ecuador does too, but they have their own [AUDIO OUT] issues right now. And then when you move past those two, we still like United, we think that they'll restore seasonal capacity to leisure destinations in the summer, this summer coming up, summer 24th.

And then we like Sun Country which is an ultra low cost airline based in Minneapolis. It's a spill carrier for people who can't get on Delta. About a third of their revenue comes from Charters and Amazon. They fly 10-737 aircraft for Amazon. So we think there are opportunities that you can buy, but we definitely think that we're going to get more buying opportunities. We didn't do a earnings preview this quarter. You know, you and I have done in prior quarters.

We were above consensus only for Delta. For everybody else we were below at or below consensus. So we think, even with the Delta news that took the stocks down on Friday, we would wait to hear first quarter guidance from the peers and then buy the deal.

Is a Spirit bankruptcy filing coming later this year?